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Shocking Yen crash! Did Bank of Japan trigger massive market shake-up?

usdjpy analysis, forex trading

In the early hours of a recent Monday trading session, the USD/JPY exchange rate experienced an unexpected spike, jumping by 1.3% to surpass the psychological threshold of 160 yen per dollar. This rapid increase was short-lived, as within minutes the rate dramatically fell by more than 3%, settling around 155 yen. The nature of this sharp decline and quick turnaround, characterized by significant volatility without any subsequent recovery, strongly implies an orchestrated intervention by the Bank of Japan.

The central bank had previously warned that it would take action in the forex markets if the yen's value continued to destabilize without showing signs of a natural correction. This sudden movement in the currency market brings to light concerns about the potential for a major shift in trading patterns, reminiscent of the fluctuations observed in October 2022.

Since the start of 2024, the USD/JPY pair has consistently demonstrated robust growth, enhancing by nearly 14% and sequentially breaking through several key resistance levels at 150, 152, 156, and finally 160 yen per dollar. This sustained increase reflects a clear upward momentum, which has been largely propelled by the strategic positioning of investors who anticipate continued divergence between U.S. and Japanese monetary policies.

The persistent strength of the USD/JPY exchange reflects deeper economic dynamics, including stronger U.S. economic indicators and a relatively dovish stance by the Bank of Japan, which has kept Japanese interest rates low while the U.S. Federal Reserve has adopted a more hawkish policy.

The upward trajectory of the USD/JPY exchange rate isn't a new development but part of a longer-term trend that started back in January 2023. Over this period, the currency pair has appreciated by an impressive 25%, driven primarily by the contrasting approaches of the U.S. Federal Reserve and the Bank of Japan towards monetary policy. The U.S. has been tightening its monetary policy to curb inflation, which has bolstered the dollar's strength.

Meanwhile, the Bank of Japan has maintained its ultra-loose monetary policy to stimulate its domestic economy, which has contributed to the yen's depreciation. These policy divergences have been key factors fueling the yen's decline against the dollar.

In the weeks leading up to the latest fluctuations, the pace of the yen's depreciation against the dollar accelerated, tied closely to the market's reaction to the unmet expectations regarding interest rate policies from the Federal Reserve and the Bank of Japan. The Fed has been less aggressive in cutting rates than anticipated, while the Bank of Japan has not raised rates as some had expected.

This has created a volatile trading environment, culminating in significant movements in the currency pair's value, particularly noticeable during the recent trading sessions in April where the USD/JPY pair gained over 5%.

Today's quieter trading atmosphere in Japan is due to the national holiday, Showa Day, which commemorates the birthday of Emperor Hirohito. His reign, known as the Showa era, spans from 1926 to 1989—a period marked by Japan's involvement in World War II and subsequent economic recovery and modernization.

The holiday typically sees reduced trading activity, providing a unique opportunity for market movements such as those observed during this latest session, where the absence of local investors possibly facilitated the sharp rise and subsequent intervention by the Bank of Japan.

Following the sharp rise in the USD/JPY rate earlier in the day, analysts suggest that the Bank of Japan took advantage of the low liquidity conditions due to the holiday to intervene in the currency market. The rapid movement from 160 to 155 yen, without any signs of rebound, points to a deliberate action to curb further yen weakening.

Analyst Prashan Newnaha from TD Securities indicated that such a move was strategically timed and likely aimed at sending a clear message to speculators. Additionally, if the Japanese Ministry of Finance aims to further communicate its stance to those betting against the yen, pushing the exchange rate to between 150 and 152 yen would serve as a strong indication of their intent to stabilize the currency.

Vincent Chung of T. Rowe Price commented on the focus of Japanese officials, noting that their concern seems to center more on managing volatility rather than defending specific exchange rate levels. The current pace of the yen's depreciation is slower compared to the previous year, which might result in a less aggressive response from Japanese authorities. He also mentioned that market indicators, such as option valuations, suggest that traders are bracing for another potential intervention by the Bank of Japan, likely after their upcoming May meeting.

During a recent press briefing, BOJ Governor Kazuo Ueda addressed the volatility in the yen's exchange rate, emphasizing that significant market fluctuations would influence the central bank's monetary policy only if they substantially impact the national economy. Governor Ueda's remarks indicate that the Bank of Japan does not view any particular exchange rate level as a trigger for automatic intervention. Instead, the central bank's decision to intervene would depend more on the overall volatility and its effects on economic stability and price levels in Japan.

Market participants often show a preference for round numbers, which tend to act as psychological benchmarks and potential turning points in trading strategies. This phenomenon was evident in 2022 and again in 2023 when the exchange rate approached 152 yen per dollar, prompting a noticeable shift in market dynamics.

Currently, similar conditions are forming that could lead to another significant change in the trading pattern of USD/JPY. The next steps depend largely on U.S. investors, who, in the latter part of the day, will decide whether to take profits from the recent price movements or to engage further in the rally, hoping to capitalize on better entry points facilitated by the presumed market interventions.

ysdjpy analysis, forex trading
USD/JPY, M15 chart, MetaTrader, 29.04.2024



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